Canada’s foreign homebuyer ban is wreaking havoc on commercial real estate deals.
The law, which took effect in January, bans foreigners from buying residential real estate for two years. It was designed to help Canadians access more housing by halting competition from outside the country.
But industry and legal experts say the law has inadvertently ensnared commercial property deals involving land, malls, grocery stores and office buildings that do not include any single-family housing.
That is because the law’s definition of residential property includes land that is zoned for residential use or mixed use, which covers huge swaths of commercial land across the country. As well, an entity is deemed foreign if a non-Canadian owns a minimum of 3 per cent of the entity.
“A lot of players, all of a sudden, are out of action,” said Kevin Lee, the head of the Canadian Home Builders’ Association (CHBA), which represents about 9,000 construction companies including land developers, trade contractors, homebuilders and manufacturers.
Mr. Lee estimates that hundreds of commercial real estate transactions have been scuttled so far. “These deals are falling through on a daily basis,” he said.
One residential developer, Dorsay Development Corp., has had to put part of its business on hold. For 25 years, it has been constructing condo units and townhouses in the Toronto region. Like other developers, it buys land to build new housing units. But the Canadian-based company is owned by a European investor.
Leona Savoie, Dorsay’s senior vice-president of residential, said she has had to pass on dozens of potential properties. “My investment opportunities have dried up,” said Ms. Savoie, who has analyzed all the sites she has considered and found that the vast majority are zoned for mixed use or residential.
Ms. Savoie said her inability to buy more land has created a “big roadblock” for Dorsay’s future plans.
Foreign entities are allowed to buy larger apartment buildings that have more than three dwelling units. They are also allowed to purchase commercial real estate that is zoned for mixed use and residential as long as the property is not in an area that has a core population of at least 10,000 people. However, this has caused some deals to be scaled back.
For example, a U.S. fund was trying to buy a portfolio of grocery stores across Canada. But because some of the grocery stores were located on land zoned for mixed use in the larger urban centres, the buyers had to eliminate the larger stores, said lawyers working for the fund.
“Anything in a major urban centre is getting knocked out,” said Paul Morassutti, a partner at Osler law firm and chair of its national real estate group. “It’s commercial property. They are grocery stores and will continue to be grocery stores. It has nothing to do with housing stock in Canada,” he said.
The Prohibition on the Purchase of Residential Property by Non-Canadians Act was unveiled in the federal budget last April when home prices were near their peak and buyers were still able to qualify for a large mortgage. Since then, the Bank of Canada has continually raised the cost of borrowing. The volume of home sales has dropped by at least 40 per cent and national home prices are down 19 per cent.
Mr. Lee said his lobby group has been talking to policy makers who helped craft the law, including in the ministries of finance and housing, as well as at Canada Mortgage and Housing Corp. (CMHC).
Mr. Lee said he has gotten the impression that they did not intend for the rules to curtail commercial real estate deals and development. “We do get the sense that they’re working on trying to make some adjustment,” he said.
The details of the law were unveiled late December, just days ahead of the Jan. 1 implementation.
The federal government said it was closely monitoring the implementation and impact of the law.
“We will continue to engage with stakeholders as we consider potential additional steps to ensure this measure does not have unintended impacts on communities,” said Leonard Catling, a spokesman for CMHC. The housing agency led the consultation process for the new law.